A home loan is a straightforward arrangement. In return for a roof over your head, you agree to spend the rest of your life as a money-earning meat puppet for the bank. It’s a fair system, according to authorities like Ayn Rand, Donald Trump, and Satan. So if you haven’t got a house or a couple of million bucks lying around, you’d best be prepared: You’ll be joining home loan hell some day. And when you do, look out for these mistakes:
Doing this at the bar was a GREAT idea. Tell me what my name is again and I’ll sign.
1. Going on Friends’ or Agent’s Recommendations
Maybe your friend got a good deal from Bank XYZ, but don’t expect the same. The loan industry is dynamic. Packages change faster than government policies before GE.
Every month, only one or two local banks tie for the best rates. And it’s rare for a bank to stay in top position for long: The bank with the best rates in March may have the worst rates in May, and vice versa. To get the best deal, you need to check the current rates. Don’t base decisions on a loan your friend took months or years ago.
On top of that, there can be 50 + home loan packages on offer at any one time. How do you know your friend checked all of them?
I need to consult my financial advisory board before taking up this loan.
Also, be wary of property agents. When you use a banker recommended by a property agent, the agent gets a referral fee (a percentage of the loan amount) from that banker. Your agent might be more interested in a fat referral fee than in getting you a good loan.
Research home loan rates yourself, through free comparison sites like SmartLoans.sg.
2. Getting Other Loans Just Before Your Home Loan Application
When deciding how much they’ll loan you (your loan quantum), a bank will check your financial history. One of the things they’ll try to work out is your debt servicing ratio (DSR).
Your DSR is the ratio of your income to your overheads. The maximum cap is typically 50%. So your home loan repayments, plus your other overheads, can’t exceed 50% of your income.
This’ll take a while. We ran out of red ink printing your financial statement.
Now, overheads include the repayments for previous loans (car loans, personal loans, etc). So the more previous loans you have, the less you can borrow. If you want enough for that million dollar condo, you better put off the other loans till after your home loan application.
3. Thinking You Must Use the Pre-Approval Bank
Approval in principle (or in-principle approval, or pre-approval, or any one of a dozen names that just mean you can buy the house already) is not an obligation.
Some Singaporeans think that, if they have pre-approval from a particular bank, they must take the loan from that bank. Because other banks won’t lend them the same amount, right?
Nope. In fact, the pre-approved loan amount is about the same for every bank. If you can get $800,000 out of Bank X, then odds are you can get it out of Bank Y. All the banks use the same general method: Check your financial history, and find your DSR (see point 2).
Unfortunately Ma’am, our bank needs more than a written promise.
Don’t take my word for it: You can go out right now, and get pre-approval from any number of banks (it’s free). Then compare the numbers and see for yourself.
You should get pre-approval to use as a benchmark; it indicates your loan quantum. But after that, don’t feel obliged to use the pre-approval bank.
4. Let the Banker Choose the Conveyancing Firm
The banks will insist on getting a lawyer, to oversee loan documents. This is also to protect you (in the same way robbing you first “protects” you from other muggers).
A bank will only recognize a law firm that’s on its panel. Since some law firms are listed on every bank’s panel, so you may think it’s convenient for bankers to choose those firms. In which case, you’re suffering an acute overdose of optimism.
Keep your eyes peeled, because bankers often steer you toward a conveyancing firm that’s only on their bank’s panel, and no one else’s. This complicates matters if you try and switch banks later: You may have to pay another firm to take over the legal work. As such, you will be discouraged from choosing another bank.
I just saw that client who’s letting you choose the firm.
And your banker’s commission will stay safe.
You can ask the banker point blank if his chosen firm is “on every bank’s panel”. Just letting him know you’re aware of it will bring out some honesty. Alternatively, speak to a mortgage broker.
5. Choosing “Exotic” Loan Packages
Whenever we get a weird question at MoneySmart, one that nobody, not even an expert, knows how to answer…this is the cause.
Exotic loans are often financial experiments. And they have terms that would make a contract lawyer reach for migraine pills. Every year, you’ll see one or two of these on the market. One piece of advice applies to them: If it seems too good to be true, it probably is.
Windows every Friday, got it. Any other parts of that loan agreement I didn’t read?
Be on the lookout for less common packages, like:
- IBR (Internal Board Rate) Loans – There’s no transparency in how the interest rate changes. And the bank can set the rate however it wants to.
- Combi-Loans - Splits the loan into two or more separate loans, and each separate loan may be pegged to a different rate.
- Interest Offset Packages - You make a fixed deposit, and the interest from that deposit pays your home loan interest. Why you wouldn’t just invest the money in an index fund, which would more than cover your interest, is beyond me.
This isn’t to say unusual packages are always bad. Just remember that such packages are unknowns; it’s hard to foresee their risks and benefits.
You can also follow us on Facebook, and we’ll update you on interesting new packages.
Image Credits:
Quiltsalad, Crystl, madaboutasia, ryarwood, boltron, Victor1558
Ever made a mistake with your home loan? Comment and let us know!
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